By Caroline Valetkevitch
NEW YORK (Reuters) - U.S. stocks rallied and the dollar index eased further on Wednesday after the Federal Reserve left U.S. interest rates unchanged, keeping its low-rate environment intact for now.
In a statement following a two-day policy meeting, the U.S. central bank signaled it could tighten monetary policy by year-end as the labor market improved further, but Fed policymakers cut the number of rate increases they expect this year to one from two.
They also projected a less aggressive rise in rates both next year and in 2018, according to the median projection of forecasts released with the statement.
The Fed has held its target rate for overnight lending between banks in a range of 0.25 to 0.50 percent since December, when it raised borrowing costs for the first time in nearly a decade.
"I think the market was expecting a more hawkish hold and instead it got a mildly hawkish hold. And you could argue the (stock) market was satisfied that you didn't see a Fed anxious to raise rates dramatically," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.
Earlier, the Bank of Japan overhauled its monetary policy to target interest rates.
The BOJ maintained its 0.1 percent negative interest rate, but abandoned its base money target. Instead, it set a "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields around their current zero percent.
The Dow Jones industrial average closed up 163.74 points, or 0.9 percent, to 18,293.7, the S&P 500 gained to finish 23.36 points, or 1.09 percent higher, to 2,163.12, while the Nasdaq Composite ended up 53.83 points, or 1.03 percent, to close at 5,295.18, a record high.
MSCI's all-country world stock index was up 1.1 percent, while Europe's STOXX 600 closed up 0.4 percent, helped by euro zone banking shares.
Gold prices also rose, hitting 1-1/2-week highs after the Fed decision. Spot gold was up 1.2 percent at $1,330.08 an ounce.
The dollar index, which measures the greenback against a basket of six other major currencies, extended its decline to a five-day low of 95.515, off more than 0.50 percent.
In the U.S. bond market, yields fell as the Fed lowered its projection for interest rate levels needed to support expansion.
In late trading, benchmark 10-year Treasury notes were up 9/32 in price for a yield of 1.655 percent, down 3 basis points from Tuesday.
"While the case for a rate increase has strengthened, they are not ready to raise rates yet," said Julien Scholnick, portfolio manager at Western Asset Management Co in Pasadena, California.
Oil prices jumped after a third surprise weekly drop in U.S. crude stockpiles helped assuage fears over a global glut.
Brent crude futures rose 95 cents, or 2 percent, to settle at $46.83 per barrel, while U.S. crude futures rose $1.29, or 2.9 percent, to settle at $45.34.
(Additional reporting by Richard Leong in New York; Editing by Nick Zieminski and James Dalgleish)